Introduction to the Authors and to the Series
Welcome to the first edition of Legal Landscape, a series designed to provide government contractors with a quick, but thorough, summary of important legal developments and regulations in government contracting, as well as a plain-English explanation of how those developments may affect government contractors at all levels of government. State and local contractors should keep in mind that state & local agencies often look toward changes in Federal regulations as a guideline.

1) SBA Proposes Major Changes to Small Business Regulations

On December 29, 2014, the SBA issued a proposed rule containing major changes to the small business regulations. Some of the most important changes are those relating to the performance of work requirements currently set forth at 13 CFR § 125.6and three fundamental changes relating to affiliation pursuant to 13 CFR § 121.103.

As many contractors know, the regulations set forth at 13 CFR § 125.6 establish minimum self-performance requirements for small business prime contractors performing various types of set-aside contracts. The intent of these regulations is to ensure that some portion of the benefits relating to small business set-aside contracts remain with actual small business contractors. The SBA does not want small business primes acting as “pass-throughs” for large businesses, which would deprive small businesses of contract revenues and negate the purpose of the agency’s small business programs. To avoid this problem, the SBA enacted 13 CFR § 125.6, requiring that the prime perform a certain percentage of the work.

The new rule proposes a complete overhaul of how contractor performance requirements are measured. The overall goal remains the same: Keep a minimum of small business dollars in small business pockets. However, rather than mandate the percentage of work a prime must perform, which is how the rule is currently structured, the revised § 125.6(a) limits how much work a prime can subcontract out to other contractors. It’s a slightly different, but important, change in perspective. Perhaps even more importantly, the proposed rule provides that subcontracts made to “similarly situated entities” are not counted towards the applicable subcontracting limit.

For example, under the proposed rule, an 8(a) contractor performing an 8(a) set-aside contract relating to general construction work cannot subcontract more than 85% of that work to non-8(a) entities.

Similarly, a service-disabled veteran-owned (SDVOSB) prime contractor cannot subcontract more than 75% of a specialty construction contract set aside for SDVOSBs to non-SDVOSB businesses.

In these examples, the required 15% or 25% of the work would have to be performed by the prime, or a “similarly situated entity”– i.e. a business that, like the prime, is eligible for the applicable small business program through which the contract was set-aside. Strangely enough, the language of the revised regulation does not require that the prime self-perform any of the work itself. It will be interesting to see if that omission changes in any way before the final rule is issued.

b) Changes Relating to Affiliation

In addition to the changes outlined above, the December 29, 2014 proposed rule would fundamentally alter three different affiliation-related analyses.

First, the rule would create an exception to the “ostensible subcontractor” rule. A small business would be exempt from ostensible subcontractor affiliation where it subcontracts with a similarly situated entity. As we stated above, subcontracts issued to similarly situated entities are not counted toward a contractor’s subcontracting limit under the proposed rule. Consistent with that, the proposed revision to 13 CFR §125.6(b) creates an exception to ostensible subcontractor affiliation for prime contractors who subcontract in this manner. The revised rule would ensure that a prime that subcontracts large portions of its work will not be “affiliated” with its subcontractors, so long as its subcontractors are “similarly situated.”

Second, the rule would adopt a bright line test for affiliation based on economic dependence. Under the proposed rule, if a concern derives 70% or more of its revenue from another company over a single fiscal year, the SBA will presume that the concern is economically dependent on that company and therefore, that the two businesses are affiliated.

Third, the rule would help clarify “identity of interest” affiliation under 13 C.F.R. § 121.103(f). The current rule states that affiliation may arise between companies owned and operated by family members, but the rule does not identify what types of family members are subject to this presumption. The proposed rule seeks to clarify this, stating: “Firms owned or controlled by married couples, parties to a civil union, parents and children, and siblings are presumed to be affiliated with each other if they conduct business with each other.”

More information on the proposed changes in affiliation can be found here.

2) OSC Proposed Rule Would Give Contractors a New Way to Report Agency Mismanagement and Misconduct

On January 22, 2015, the United States’ Office of Special Counsel(OSC) issued a proposed rule that would give government contractors and subcontractors a new way to report agency wrongdoing. The rule would allow contractors and subcontractors who observe mismanagement or misconduct by a federal agency to bring their complaints directly to the OSC. Contractors could also go to OSC if they believe they have suffered retaliation for prior disclosures or statements made about agency misconduct. The hope is that this new program can provide contractors a more effective way to report wrongdoing within the government.

On January 29, 2015, the Federal Acquisition Regulatory Council issued a final anti-trafficking rule designed to strengthen protections against human trafficking. The new rule will require that all federal contractors take certain actions to combat human trafficking and slavery in their supply and contracting chains. Federal contractors will now be required to:

Develop and maintain a detailed compliance plan for supply contracts (other than commercially available, off-the-shelf items) relating to goods acquired outside the U.S., or services to be performed outside the U.S., with an estimated value exceeding $500,000;

Ensure that workers aren’t being charged recruitment fees (which are common in many foreign countries);

Notify agents and employees of the anti-trafficking policy;

Disclose (or self-report) if an employee, subcontractor, or subcontractor’s employee is violating the rule; and

Annually certify that, (1) it has implemented a compliance plan, and (2) after a due diligence inquiry, there are no violations of this FAR provision by the prime contractor, its subcontractors or agents, or, if such a violation exists, that remedial action has been taken.

Perhaps the most noteworthy new requirement is a contractors’ obligation to investigate the compliance of their subcontractors (at every tier), and the related obligation to continually monitor all subcontractors for violations. The rule is effective as of March 2, 2015.